Applications of Everyday Leadership

Professor Gregory Northcraft

This case study is adapted from Professor Roy Lewicki’s case study: Detection Technology. The full reference is given in the module 8 Debrief
Video of Professor Northcraft’s Application of Everyday Leadership Coursera course.

DETECTION TECHNOLOGIES, INC.

GENERAL INFORMATION

Detection Technologies, Inc. (DTI) is a high-tech San Francisco Bay Area firm that employs about 750
people. DTI's primary product is a bio-electronic detection system developed and manufactured
under contract for the U.S. government. This system is used for detecting various types of life forms
through radar-like procedures. Because of the highly classified nature of the manufacturing process
and the need for manufacturing to occur in a relatively pollution-free environment, DTI originally
chose to separate its manufacturing facilities from its main offices.

The manufacturing facilities are located in a remote rural area southeast of Hollister, California, a bit
over two hour’s drive from San Francisco. DTI purchased several hundred acres of land off Quien
Sabe Road that provide the adequate security and air quality for manufacturing and full-scale test
operations. While it is a picturesque area (in rolling hills and horse country) far away from the
congestion of the Bay Area, it is not without its faults. Access to the plant requires almost an hour of
driving from Interstate 101, some of it over poorly-maintained roads; manufacturing employees
constantly complain of the wear on their cars. The road can be rain-slicked, muddy, and treacherous
in the winter. Most of the 600 workers (450 hourly, 150 professional support staff) employed in the
Hollister manufacturing facility commute from a 40-50-mile radius over this road into the plant;
traffic congestion, particularly around the times of shift changes, makes travel and access a highly
undesirable aspect of working for this plant. Employees have nicknamed the facility, "Hell-and-
Gone."

The manufacturing facility itself is not air-conditioned and, hence, can get uncomfortably hot in the
summer and stuffy in the winter. The closest town, Hollister, is half an hour away. The Hollister
facility has a cafeteria for the hourly workers, but the food is cooked elsewhere and reheated. The
menu is limited and expensive. Facilities for the professional support staff at Hollister are somewhat
better than for hourly employees; office space and lighting are adequate and the building is air
conditioned. There is no separate cafeteria, however, and no place to "entertain" visitors.
Professional staff alternate between bringing their lunches, occasionally purchasing the cafeteria
food to eat, or car-pooling the 30-minute drive down to Hollister. Dissatisfaction and low morale
among the professional staff has been a problem.

The San Mateo facility

The company’s executive offices, the U.S. government liaison offices, and the research and
development laboratory all are located near the San Francisco airport in San Mateo, on the peninsula
between San Francisco and Palo Alto, California. Also, there are test facilities on a one-tenth scale for
ongoing research and development programs. Administrative services for the company are
headquartered in the San Mateo offices: human resources (including hiring and payroll), security, data
processing and system analysis, and research engineering and design. The buildings are spacious, clean,
air-conditioned, and boast two cafeterias: one for hourly workers and one for research personnel and
executive officers. Employees can also go out for lunch, and there are many good restaurants nearby.
Working hours are more flexible, and the environment more relaxed with less visible pressure. While
normal starting time is 8:00 a.m., professional staff members drift in as late as 9:30 and often leave early
in the afternoon. Working from home is common. On the other hand, when deadlines or schedules have
to be met, it is not unusual to find the very dedicated R&D staff working 60 hours in a week. The work
environment is more informal and displays a casualness similar to a research university setting.

As the majority of the San Mateo facility workers are professionals, they consider themselves to be a
"cut above" the manufacturing and technical service employees at Hollister. While they acknowledge
the value of the revenue generated by Hollister, they are convinced that it is really the San Mateo R&D
group that "carries" the company. Without their high-level technical advances, DTI would not have the
outside reputation it has for top-quality products. Inside DTI, however, rivalries have led to the creation
of "domains" or "kingdoms" among the professional staff. The primary split is between Hollister and the
San Mateo facility, and over the years it has fostered extensive duplication of efforts. Each group
(testing, maintenance, etc.) has been able to procure tools and equipment for itself that normally would
be shared if the two locations were closer. The San Mateo technical staff has even subcontracted
certain testing and development operations to suppliers who are competitors of DTI, due to their basic
lack of respect for in-house capabilities of the professional staff at the Hollister facility, and due to the
red tape and expense of having to work through the Hollister planning and scheduling staffs.

The Contract Bidding History

In recent years, DTI has put out numerous competitive bids for civilian and military contracts, but few
projects have been forthcoming. Analysis of failed bids revealed that rejections have been due to
excessive cost estimates rather than weak technical capabilities. DTI is considered to be one of the very
best quality-based manufacturing firms of its kind in the country. However, the overhead costs at DTI
have become prohibitive. The cost of operating two sites, duplication of effort (e.g., technical testing
and maintenance, as well as HR personnel needed at both sites), overstaffing, and a blurring of goals for
corporate growth and expansion have caused the overhead rate to be three times higher than that of
some competitors. For example, the Air Force had recently issued a request for bids on the
development of a new bio-electronic system, similar to DTI's current product. The "development
contract" alone would have been worth $25 million, and the production contract for these units would
have been worth more than $200 million. DTI was positive that they would get the contract. When the
government evaluated the bids from five different companies, however, DTI came in first in the
technical rating of bids, but fifth in the cost aspect; DTI did not get the contract.

The Alternatives

Top management's reaction to this setback was to propose a massive cost reduction plan. Many high-
salaried technical and engineering personnel were let go. The housecleaning was overdue; some
"deadwood" and duplication of effort was eliminated. But it quickly became clear that further
reductions in overhead costs would be necessary in order for DTI to regain its competitiveness.
DTI leases the San Mateo facility, and top management decided that the most obvious way to achieve
the needed cost reductions would be to close up shop in San Mateo, and move all of the Bay Area
employees to the Hollister facility. This consolidation was expected to reduce much of the duplication of
effort and save the company as much as $4 million annually, as well as provide better coordination on
existing and future projects.

In thinking through how the proposed move might be accomplished, top management considered a
few measures designed to make it as palatable as possible. For example, DTI would provide a special
bonus of one month's salary for relocation expenses, would notify other companies in the Bay Area of
the names and resumes of terminating employees, and would (to whatever extent possible) set up
employment interviews with these companies.

It was clear to management that even with the generous (and expensive!) relocation plan they had
outlined, the move would be hugely painful for the organization and could represent some very real
costs in terms of overall effectiveness. Yet, they saw no alternative but to proceed with the proposed
consolidation.

When the details of the consolidation plan leaked out, the plan was met with a massive reaction of
hostility and despair. Almost all of the Bay Area professional employees – many of whom had never
even visited the Hollister facility – felt that a relocation to Hollister would mean a sharp decline in status
with their peers in similar industries. Most have homes on the San Francisco Peninsula, and the drive to
Hollister would increase the commuting time dramatically. Top management thus suspected that a
certain percentage of employees would terminate rather than relocate to Hollister. Top management
estimated that a "safe level" of termination was 22 percent; if terminations reached 35 percent in any
occupational group, it would be a critical problem. Management informally surveyed employees and
found that among the administrative staff, the termination rate was likely to be near 20 percent.
The strongest reaction to the proposed consolidation came from the company's research and
development staff. They had grown used to having their laboratory and test facilities in the highly
professionalized San Francisco Bay Area and drew heavily on informal relationships with faculty at the
area's prestigious universities (especially Stanford and Cal-Berkeley) for ideas and information. Their
view was that being forced to move to Hollister, in addition to being "lifestyle" undesirable, would
cripple their ability to function effectively because of their loss of contact with similar professional
colleagues. Of the 25 members of the research and development staff, only two directly expressed a
willingness to consider the move to Hollister. The others claimed they might “test the waters” of the
many other employment opportunities their specialties commanded. They formally expressed their
resistance in a letter to the company president (attached as Exhibit A). The letter was written by a
committee of R&D personnel formed to represent the group's interests regarding the proposed move.
In the letter, they outlined their concerns and volunteered to take 20 percent salary cuts to contribute to
the reduction of overhead costs. This salary reduction would total almost $500,000.

After reading the statement sent by the committee, the president of DTI conferred with the vice
president for R&D (who is the immediate supervisor of the R&D scientists). The two discussed the
committee's letter and agreed that the situation was serious. It was clear that the Hollister move might
create unforeseen legitimate problems for the vital R&D personnel and that management had erred in
not seeking wider input in considering their costs reduction alternatives.

The management team (additionally including the VPs for Finance & Administration, Marketing & Sales,
and Manufacturing) debated the alternatives. They understood the frustrations of the research and
development staff but were faced with having to cut millions from annual costs in order for DTI to
become competitive again. Closing the San Mateo facility and moving everyone to Hollister still seemed
the obvious solution.

DTI’s president wrote a letter to the R&D committee (Exhibit B) acknowledging their concerns and
inviting a couple of representatives of that group to come to a meeting with the president and their
immediate boss, the VP for R&D. The president was careful to make no commitments or promises in the
letter; simply, two of the R&D scientists were invited to a meeting.
 Exhibit A

President
Detection Technologies, Inc.
300 Commonwealth Ave.
San Mateo, CA

Dear President:

Our committee, representing your Research and Development staff in San Mateo, wishes to express
its serious concern about the recent events which have affected our company. We believe that DTI’s
survival depends on our retaining our technical excellence, and we are dismayed that you and your
management team seem to be contemplating actions which would cripple that capability.

We have all been shocked by our recent loss of contracts. However, it is critical for you to note that
we have never been faulted for our technical expertise. It is our cost structure that prevents us from
winning these bids. But an action that addresses the cost problem while destroying our ability to
compete technically simply trades one problem for a more disastrous one. Closing the San Mateo
facility and consolidating operations at Hollister creates just such a trade, and that is unacceptable.

Although no formal announcement of management’s response to the current situation has been
provided, it is clear that consolidation is in the wind. We believe that forcing R&D to move to the
Hollister location will ruin the professional network that is our (and the company’s) most treasured
asset. Some alternative must be found; if it is not, the members of our department will seek
individual solutions to the personal dilemmas this intended consolidation would create.

It is time that management emerges from behind closed doors and asks vital members of the
company team to become involved in this decision. If management intends to launch this
consolidation effort, we believe it will have disastrous results, and it seems unlikely that San Mateo
Research and Development staff will remain with the company.

Our interest is in the company’s survival. If it is necessary, the members of the committee would be
willing to agree to a 20% salary reduction in return for keeping the San Mateo facility open. We
request an opportunity to speak with management about this vital decision which massively effects
all of us.

Sincerely,
[signed by all members of the committee]

Exhibit B

[addressed to all committee members]

Research and Development
Detection Technologies, Inc.
300 Commonwealth Ave.
San Mateo, CA

Dear [names]:

The VP for R&D and I have given our most serious consideration to the points you raised in your
recent letter. We share your interest in doing what is best for DTI and welcome your interest in
contributing to that goal.

It is clear that our technical expertise is one of our greatest assets and that the work of the Research
and Development staff in San Mateo is vital contributor to that expertise. We have no wish to reduce
our technical competitiveness. Nevertheless, our failure to produce contract bids that are cost
competitive is a problem which requires a painful solution – and quickly if DTI is to remain financially
viable.

We acknowledge that we have begun to examine the consolidation of all of DTI’s operations at the
Hollister facility. Such a consolidation would reduce duplication of facilities, equipment, and
personnel and these reductions would contribute significantly to an overall cost saving.

At the same time, we believe that this action would be unwise if it truly has the crippling effect on
our R&D effectiveness, as you forecast. Our dilemma, as the management team for DTI, is to address
the need for major, fast cost reduction while providing for the continuation of our technical
excellence.
In response to your letter, I would ask that your committee send two of its members to a meeting
with myself and your immediate boss the VP for R&D, to discuss the situation as it has evolved. We
share an interest in DTI’s survival if we can develop a plan that is mutually acceptable in achieving
that goal. I look forward to meeting with you.

Sincerely,

[signed by the President of DTI]

DETECTION TECHNOLOGIES, INC.

Management Team Representatives

You (the president and the VP for R&D) will meet with two representatives of the Research and
Development committee. As representatives of the management team for Detection Technologies, Inc.,
you are interested in saving the company; you recognize that the loss of the majority of your Research
and Development scientists would be a crippling blow to the firm. Your fundamental interest is in DTI's
survival.

Several things are on your mind as you attempt to discover a solution to the relocation problem:

1. Regardless of your company's technical leadership, the Department of Defense will not award any
more contracts to DTI if overhead costs are not reduced. You see the consolidation of all personnel
and facilities at Hollister as the obvious way to accomplish this cost reduction. The consolidation at
Hollister would create considerable difficulty and you would prefer to minimize those problems. If
there are viable alternatives that would still create enough cost savings, you have not identified
them.

2. You have tried to be as fair as possible in managing the possible relocations for those affected. You
believe that getting the R&D personnel to move is one very important element of the plan. So far,
you have not sensed organized resistance from any other employee group.
3. You know that you would have extreme difficulties replacing the R&D personnel. If a majority of
them decide to leave the firm, the largest single problem will be in maintaining progress in R&D
while new people are being hired and trained.

4. Some members of the R&D group may not really be willing to leave the company. The VP for
Research & Development recently announced plans for retirement a year from now, and people
have been openly talking about one of the San Mateo R&D staffers as the natural successor. Finally,
do not hesitate to appeal to the professional responsibility and loyalty of all of these scientists –
particularly the older ones. This is a time when the whole company needs to pull together to
address the financial crisis.

5. You are concerned about the outsourcing of some testing work by the San Mateo R&D staff.
Clearly it has been much more convenient for them than relying on the Hollister facilities and
professional staff. On the other hand, it has fostered morale problems with the Hollister group.
Constant duplication of equipment and material, as well as morale problems, will be reduced if the
R&D group moves to Hollister.

6. You all are aware of the personal strains that a move will create. Your own families are personally
attached to the Bay Area as well, and the management team also will have to move their homes in
order to minimize an "impossible" daily commute.

7. You are aware of the advantages that Bay Area location offers in terms of the abundant scientific,
academic, and technical resources in its environment. You must deal with the R&D professionals'
claims that a move to Hollister would destroy DTI's R&D competitive advantage, via the diminished
"informal stimulation" that the environment provides for these people.

Dealing with the Committee's Position

In spite of the above concerns, you would be willing to listen to any proposal that reduces overhead
costs by a figure close to the apparent benefits of consolidating operations in Hollister. It is clear that
the needed savings can be achieved with the Hollister consolidation and you are willing to make some
concessions in order to change the R&D department's mind about relocation. Your interest in the
meeting is to find a way to save the company through drastic cost reduction while maintaining technical
quality.

If consolidation to Hollister remains the only viable plan, you are prepared to consider some of the
following concessions. Cost savings are a primary consideration, so you cannot concede more than is
absolutely necessary. You may find that one or two additional concessions may be needed as a last
resort. If the management team can find a viable alternative to relocating everyone to Hollister, which
satisfies your primary objectives/concerns, any proposed modifications to the Hollister site would, of
course, be irrelevant to these discussions.

1. Cafeteria food service, etc.:

 The cafeteria and other facilities for the staff at Hollister could be renovated in 6 months at an
estimated cost of $200,000 – $250,000 if the renovations include the creation of a separate dining
area for the professionals. These facilities could be renovated in as little as 4 months, but at 20% to
30% additional cost.

2. Laboratory facility renovation:

The Hollister testing and maintenance labs could be renovated for R&D use over the next 8 months,
at an estimated cost of $250,000. Renovation could be completed in as little as 4 months, but it
would probably cost 50% more. With the consent of the R&D scientists, some equipment that
currently is duplicated between Hollister and the San Mateo lab could be sold off and those funds
used to help underwrite further equipment improvements.

3. For those moving to Hollister:

It would be relatively easy to bring in a local real estate agent to act as "relocation director" to help
with the moves; DTI also could pay points on new loans and offer limited second mortgage
assistance at 0% interest rates. If necessary, top management has discussed the possibility of
covering real estate agents' fees for the sale of current residences and offering up to a $6000
bonus for "residence relocation."

4. For those who will commute from the Bay Area:

As an important employer in Hollister, you have been lobbying the county to improve the road into
Hollister, and they have promised action soon. You could also organize some sort of "carpool." If
necessary, you have discussed the idea of providing a company van for commuters.

5. Scholarly interaction.
You could offer up to $5000 annually for a research seminar series to attract visiting scholars to
Hollister. Also, increased flexibility in work hours and a program of "personal days" for the
scientists to meet with colleagues in Palo Alto (or other Bay Area locations) would not be difficult. If
necessary, you could put as much as $10,000 in the seminar series fund, and you could offer the
scientists personal travel funds of up to $1500 to attend professional meetings.

6. As a last resort...
You could offer each of the scientists up to $5000 in "relocation expenses" – paid to each R&D
employee with no strings attached.

You will need to represent management’s point of view to the committee representatives when you
meet with them. You must close the San Mateo facility; that seems non-negotiable. On the other hand,
any proposal which saves the company, reduces overhead sufficiently, and keeps the key employees on
board is acceptable if you agree to it.

Revised and used with permission of the author R.J. Lewicki @ The Ohio State University.